Evaluation of Capital Structure Policy of Bellamy's Australia and A2 Milk Company

Capital structure refers to mixture of equity and debt capital and capital structure policy
refers to guidelines that help management to create optimal capital structure. Optimum capital
structure refers to capital mix that minimizes the weighted average cost of capital.
In this assignment capital structure policy of Bellamy's Australia and A2 Milk Company
has been evaluated through calculating and analyzing capital structure ratios of both the
companies. In addition to this, impact of fresh issue of equity shares has been evaluated through
analyzing before and after capital structure and earnings per share (EPS) of the two selected
companies.
Capital Structure ratios of Bellamy's Australia and A2 Milk Company
Capital structure policy can be easily evaluated through use of capital structure ratios
such as debt ratio, debt to equity ratio and interest coverage ratio.
Debt ratio: Debt ratio is very important ratio as it measures proportion of value of debt capital to
the value of total assets. In short this ratio determines the management decision on use of debt
capital to finance the assets (Brigham & Michael, 2013).
Formula: Total Liabilities (Short term and long term liabilities) / Total Assets
Debt Ratio
Particulars Bellamy's Australia The A2 Milk Company
2016 2017 2018 2016 2017 2018
AUS $'000 AUS $'000
Short Term
Liabilities or
Current
Liabilities
$
60,116.00
$
65,353.00
$
73,409.00
$
76,808.00
$
102,348.00
$
166,749.00
Long Term or
Non Current
Liabilities
$
164.00
$
29.00
$
45.00
$
266.00
$
100.00
$
120.00
Total Assets
$
143,501.00
$
156,641.00
$
280,812.00
$
210,152.00
$
343,930.00
$
722,578.00
Debt ratio 42.01% 41.74% 26.16% 36.68% 29.79% 23.09%
(Bellamy’s Australia Limited, 2017 and The a2 Milk Company, 2017) and (Bellamy’s Australia
Limited, 2018 and The a2 Milk Company, 2018)
Debt to Equity Ratio:
Formula: Total Liabilities/Value of equity shareholder’s
Debt to Equity Ratio
Particulars Bellamy's Australia The A2 Milk Company

2016 2017 2018 2016 2017 2018
Total Liabilities
$
60,280.00
$
65,382.00
$
73,454.00
$
77,074.00
$
102,448.00
$
166,869.00
Shareholder's
Equity
$
83,221.00
$
91,259.00
$
207,358.00
$
133,078.00
$
241,482.00
$
555,709.00
Debt to Equity
Ratio 72.43% 71.64% 35.42% 57.92% 42.42% 30.03%
(Bellamy’s Australia Limited, 2017 and The a2 Milk Company, 2017) and (Bellamy’s Australia
Limited, 2018 and The a2 Milk Company, 2018)
Interest Coverage Ratio:
Formula: EBIT/Interest Expenses (Damodaran, 2011)
Interest Coverage Ratio
Particulars Bellamy's Australia The A2 Milk Company
2016 2017 2018 2016 2017 2018
EBIT
$
54,306.00
$
593.00
$
60,269.00
$
52,002.00
$
138,599.00
$
281,001.00
Finance Cost
$
10.00
$
1,364.00
$
230.00
$
205.00
$
135.00
$
138.00
Interest Coverage
Ratio 5430.60 0.43 262.04 253.67 1026.66 2036.24
(Bellamy’s Australia Limited, 2017 and The a2 Milk Company, 2017) and (Bellamy’s Australia
Limited, 2018 and The a2 Milk Company, 2018)
Favorable or unfavorable financial leverage
Favorable financial leverage is position where return generated by the company is higher
the cost of debt capital where unfavorable financial leverage position refers to the position where
return generated by the company is lower than the total cost paid for employing the debt capital.
On the basis of calculation of debt ratios of both the companies it can be said that A2
Milk Company has most favorable financial leverage position as it has the lowest debt ratio and
also the debt to equity had decreased to 30% in year 2018 as compare to 58% in year 2016. Also
the interest coverage ratio of A2 Milk Company was better than Bellamy’s Australia. It is the
main reason why A2 Milk Company has most favorable financial leverage position as compared
to A2 Milk Company.
Impact on capital structure and EPS of both the companies after the fresh equity shares of
value 10 million has been issued